Every seminar I give and every consulting job I do, folks ask about compensation. How to do it? What works and what doesn't? What's a fair/competitive program for employees - but still fair to the business? My answer is: There is no one set answer. Compensation programs are complex and need to be customized for your business to make them do what you want them to do. In the next two articles I will try to spell out the strategies and components that need to be considered when developing a winning compensation program.
Several times in the past I have recited five things that I believe every business owner should strive to achieve in the area of human resource management. I maintain that if you do these five things the best, that you strongly enhance your potential to be the best!
- Hire the best
- Train the best
- Communicate the best
- Motivate the best
- Compensate the best
Each of these areas is more than can be adequately covered in an article or a seminar. Each has a number of components and pieces. And all too often owners/managers fall short (in my opinion) in their management skills in the all-important human resource function.
The compensation system that you establish for employees is one of the main engines that drives your business. And if your company is like most companies, it's an expensive engine to maintain and probably even your No. 1 expense. The industry average for total people costs as a percent of total operating expenses is 55% to 60%. That means your people account for more than half of total expenses. It's a big number.
But payroll is more than simply an “expense.” How much you pay your employees and the factors that you use to establish pay scales and award bonuses and other incentives can profoundly affect the quality of your workforce. And, equally important, it can affect your ability to attract and retain productive, reliable employees.
Times are a-changing. The old automatic pay increases for time in grade are disappearing in favor of performance-based pay. Hurray for that. And the automatic cost-of-living increase is fading away also. But the complexities and legal issues of compensation remain.
Let's start with some easy definitions of the most common words and terms:
- Compensation. This defines all the “rewards” that employees receive in exchange for their work, including base pay, commissions, bonuses and other incentives.
- Base wage or salary. This is simply the salary or wage - before deductions and other incentives - that employees receive for the work they do. To get a bit more technical, wages normally refers to hourly paid employees and salary to employees who receive a weekly, bi-weekly or monthly amount regardless of how many hours they work.
- Incentives. Incentives are special rewards, such as bonuses, spiffs, stock options, etc., that you offer to employees in addition to their base wage or salary.
- Benefits. These are more special rewards that you offer to employees in addition to their base wages or salary. Examples include health insurance, retirement plans, vacation, sick days and so on.
- Exempt workers. This classification defines employees who receive salaries (not paid on an hourly basis and thus not eligible for overtime pay).
- Non-exempt workers. These are full-time and part-time employees whom you pay an hourly wage. Minimum hourly wages and overtime pay does apply to these employees.
- Commission. This term refers to a percentage of the sales price or gross profit margin that salespeople receive. Commission arrangements are sometimes “straight” (with no salary); sometimes combined with a partial base salary; and sometimes part of an arrangement in which the salesperson receives a set amount (known as a “draw”) on a regular basis, regardless of how much commission is actually earned during that period, with adjustments made at set intervals, such as every three months.
Setting The Foundation For An Effective Compensation System
First of all, in thinking about compensation, you must think system. And you must think strategically, with an eye toward the needs and goals of your business. An effective compensation system is a well-thought-out set of practices that helps to ensure the following results:
- 1. Your employees receive a fair and equitable wage (from both your perspective and theirs) for the work that they perform.
2. Your payroll costs are in line with the overall financial health of your company/showroom.
3. Your basic philosophy of compensation is clearly understood by your employees and has the strong support of managers and employees alike.
4. The pay scale for the various jobs in the company reflects the relative importance of the job and the skills that performing those jobs require.
5. Your pay scales are competitive enough with businesses in your marketplace so that you're not constantly seeing those competitors hiring your top employees away from you. As mentioned before, your goal should be to be the best compensating showroom in the area, so that your competitors' best employees will be knocking on your door.
6. Your compensation policies are in line with local, state and federal laws involving minimum wages and job classifications (exempt vs. non-exempt and contract employees).
7. Your compensation policies are keeping pace with the changing nature of today's labor market, particularly in recruiting and retaining the best showroom employees who are in strong demand.
Yes, there's a lot to developing an effective compensation strategy. Too many wholesalers try to be penny-wise rather than dollar strong. The results of the SUPPLY HOUSE TIMES Showroom Survey show that wholesaler showroom sales consultants and managers are paid very much on the low side (in my opinion). An average of $27,000 for sales consultants and $35,000 for managers is considerably less than many independent decorative plumbing and hardware businesses pay their people.
At the same time, the sales and gross margin productivity at wholesaler showrooms by sales consultants is low: $33,000 a month in sales at less than 30% gross margin. I'm thinking there's a corollary there - low pay equals low productivity and vice versa.
I have several consulting clients (wholesalers and independents) that have sales consultants averaging $75,000 to $100,000 in sales every month at 35%-plus margins. These people in turn are compensated at $65,000-plus per year. Possibly the old adage that “you get what you pay for” may apply here.
Because of the importance and complexity of this all-important topic, I'm going to have to continue the subject in my next article. We'll get more detailed and outline some specific compensation plans that work extremely well for showrooms. Don't miss it! <<
